“Bureaucracy rocks!” That was the first lesson Tuck Lye Koh, founding partner and CEO of China’s venture capital firm Shunwei, learned about India.
An Indian entrepreneur taught him that when Koh first came to India scouting for investment opportunities a year ago. “His [the entrepreneur’s] answer to most of the problems in his venture that needed to be ironed out was a plethora of “contacts” he has in the government. He told me about a lot of things around how to grow his venture. Some of them will attract regulatory permission. And he said “no problem, I will get it done.””
For an investor bringing in huge sums of money in the Indian #startup scene, several other concerns precede the issue of bureaucracy. Chinese investment in India has been meagre in the last few years. Between 2000 and March 2016 investment from China in Indian startups added up to just over US$1.35 billion, accounting for about 0.5 percent of the total foreign direct investment inflow into India. The amount increased to US$2.3 billion between June and August this year. Still, the investment from China is widely behind investments from Mauritius and Singapore, which together accounted for US$140 billion during the same three-month period.
“Chinese investors started exploring India actively for opportunities only about two years ago. Increasing the amount of investment here will take time, as the market study is also important,” says Hon Yin Lee, managing director, Asia Pacific TMT investment banking group at Citi.
What takes a week in China takes 30 days in India.
The reason why Chinese investment in India has been slow comes down to India’s skepticism towards Chinese products: they’re often perceived to be of low quality. Chinese telecom hardware companies like Huawei and ZTE were also scrutinized for alleged espionage and other national security concerns. With recent territorial conflicts with China, the “Boycott Chinese goods” slogan has gained momentum.
But that may be set to change. There has been a surge in investments from China after the Indian government eased certain trade restrictions on Chinese companies and offered favorable tax rates.
With the double whammy of economic slowdown in China due to slowing industrial profits and persistent currency weakness, investors are increasingly turning to India to deploy capital for growth. Why: India has a huge addressable market when it comes to technology and tech-based products. The internet penetration in India is still at 27 percent but it’s growing fast. The country has just about 150 million smartphone users.
Alibaba comes calling
The trend of Chinese businesses making investments here started in 2015 with Alibaba investing in Indian unicorns such as Snapdeal and Paytm. “Most of the investments being made here are on big startups, those that have shown scale and growth. Seed funding for new startups is still low from China,” says Lee.
Lee observes that, while the two markets are generally similar, micro-level differences act as a culture shock for many in China. This is why Chinese investors want to play it safe.
So what are these differences?
For one, Indian startups develop services and products with an aim to expand overseas and go global. India also has a significant English-speaking population which opens up several other markets abroad. But Chinese startups are focused on solving local problems.
India’s data problem can prevent certain business models that worked in China, from being successful In India.
“India is a developing market, so Chinese companies are investing here thinking they will replicate their success models here, for long-term gains,” Lee says.
But what worked in China will not necessarily work here. For starters, language diversity is a huge area of concern. In Mandarin-speaking China, a unilingual product can serve the whole nation. Cut to India: every region has a different language, and many speak only the vernacular. Here, customization of a service becomes crucial, but it also costs much more money. Or, as Koh puts it, “it complicates scaling up opportunities and alienates a lot of potential users.”
Bloated cost structures
Lee of Citi feels that many Indian startups are “highly overvalued” and have bloated cost structures. But, at the same time, consolidation is a difficult process here. Lee is, nevertheless, optimistic that as India’s startup ecosystem matures, there may be a similar shift towards solving local problems.
Then there’s also the problem of too many players in the same space. “Competition in China is fierce but also pragmatic. Consolidation is common between two big rivals. In India, there can be several players in the same space, but the merger is usually not an option a founder considers,” he says. Mergers could be an effective way to maintain the true valuations, cut costs and become more efficient, he adds.
Internet in India is slow, we all know that. But the bigger concern for these investors is that only about one-third of the population has access to the Internet. While there are several big ecommerce startups in India, the addressable audience is limited because of low internet penetration.
The foremost difference between India and China is rooted in history. China picked manufacturing and India picked services.
One investor noted that India’s data problem can prevent certain business models that worked in China from being successful In India. It also severely impairs a company on analytics and big data collection. “It can also limit the types of Indian startups that can arise. Hardware development, for example, is negligible,” she added.
China, on the other hand, is known for its capabilities in hardware. In India, hardware innovation and manufacturing struggles because the infrastructure to support is virtually non-existent. “It increases the time between developing a product and taking it to the market. From an investment perspective, it increases the gestation period, and also the risk,” Lee says.
In a nutshell, the longer time period to fund a tech hardware startup is pushing investors away. Lack of local testing tools means that startups in this space have to seek funding to develop a prototype. “What takes a week in China takes 30 days in India,” Koh quips.
Unequal spending power
“The foremost difference,” Koh says, “is rooted in history. China picked manufacturing, and India picked services.” He explains that focusing on the service sector creates a smaller but highly-skilled workforce. On the contrary, manufacturing offers opportunities at all levels of society, creating jobs and thus increasing the purchasing power.
In India, there’s a pocket of people who have high spending power and can afford luxury products. Then there is another section that believes in discounts that ecommerce sites generally cater to. Then there is a huge rural population who don’t have access to all the tech innovations happening in India. The spending in China is more or less consistent across the population, which is not the case with India. “It is a major factor to keep in mind when we are looking at investing because scaling up is never easy in such a situation,” Koh adds.
However, the mood is not all that grim. With funding options narrowing, Indian startups are going out of their way to woo new investors.